The Department of Finance published a report titled The changing nature of outbound royalties from Ireland and their impact on the taxation of the profits of US multinationals, authored by Seamus Coffey.

The report outlines that large outbound royalty payments are made from Ireland as license fees for intellectual property developed elsewhere. As detailed within the report, these outbound payments amounted to €84.3 billion in 2019 and preliminary figures for 2020 show outbound payments amounting to €83.6 billion.

The report highlights a geographical change in the destination of outbound royalty payments from Ireland in 2020. In 2020, a number of US multi-national companies (MNCs), particularly in the information and communications technology (ICT) sector, changed the licensing arrangements for the use of their intellectual property by their international operations due to changes to the OECD Transfer Pricing Guidelines, changes to corporate residency rules in Ireland and impact of the 2017 Tax Cuts and Jobs Act in the United States.

Through a case study of a US ICT MNC, the report analyses the impact of the changing nature of outbound royalties from Ireland on the taxation of the profits of US multinationals and explores how the above changes impacted the effective tax rate of a US MNC.

The report focuses on three elements of the 2017 Tax Cuts and Jobs Act. These are:-

• the one-time transition tax on pre-2018 profits of US MNCs which had benefitted from deferred taxation;
• the US tax due on what is deemed to be global intangible low-taxed income (GILTI); and
• the relief provided by the US for foreign derived intangible income (FDII).

The report details that it is unclear as to whether the scale of outbound royalty payments is a signal of aggressive tax planning as an increasing share of payments flows directly and in full to the United States.

The changed pattern of royalty flows from Ireland is now said to be more in line with the economic substance of these companies and, according to the report, the reporting of their profits is better aligned with the function, assets and risks that generate those profits.

The report concludes that, “Outbound royalty payments continue to be made from Ireland for the use of the resulting technology but rather than being routed to offshore financial centres benefitting from a deferral of US tax as was the case under the pre-2018 US tax regime, this income is now being directed to the United States. In 2020, around 60 per cent of the royalty payments from Ireland went to the United States. This share is likely to increase in coming years.”